Top earners get much of Scott Walker cut but pay more in income tax

Madison - The highest-income taxpayers getting the biggest chunk of Gov. Scott Walker's proposed tax cut are paying an even larger share of the overall income tax in Wisconsin, a Journal Sentinel review has found.

The newspaper's analysis shows how many angles there are to seemingly simple questions - who benefits the most from the two-year $332 million income tax cut proposal and why? To get a fuller picture, the newspaper looked at figures from the Legislature's nonpartisan budget office and consulted with other tax experts.

Here's the upshot: State projections show the top fifth of taxpayers - those making more than $100,000 a year - would receive just under half the benefits from the Republican governor's proposed tax cut in 2014.

But the flip side of that finding is that without Walker's proposal, those upper-income Wisconsin taxpayers would pay 61.2% of the total income tax in 2014, according to numbers from the Legislative Fiscal Bureau.

Which of those two statements voters find most compelling will help decide how they feel about Walker's proposal to cut tax rates for lower income brackets.

"If you're going to do a tax cut based on rates, almost no matter what you do, the savings are going to accrue more to the top than to the bottom, because (upper-income families) pay more of the income tax," said Dale Knapp, research director for the Wisconsin Taxpayers Alliance.

In the coming months, lawmakers and Walker will grapple with the question of how to reshape the state's taxes. As they do so, they will have choices besides just cutting tax rates, such as increasing the deductions for taxpayers - alternatives that so far haven't been a prominent part of the public debate.

Walker has said his proposal is a "middle-class tax cut" aimed at addressing the fact that income taxes in Wisconsin are highest on middle-income earners, at least when compared with those in other states. To start addressing that, Walker's budget bill would drop rates for the state's three lowest income tax brackets but wouldn't change those for the top two brackets.

The average cut for all tax filers in Wisconsin would be $83 for 2014, or 2.2%. Families making more than $200,000 per year in adjusted gross income after deductions would receive just over $290. Families making $25,000 to $30,000 would receive around $22.

When the tax rates are cut for lower income brackets, all taxpayers benefit because the wealthy also pay taxes at those lower rates.

The tax cut is just a small share of the state's income tax, or about $170.1 million out of the $7.64 billion expected to be paid to the state in 2014, so it will not have a huge impact on how the state income tax treats wealthier taxpayers compared with lower-income filers. The proposal should increase the share of the overall income tax paid by tax filers making more than $100,000 a year, but the change would be minuscule, about three-tenths of a percentage point.

Taxpayers making more than $100,000 a year in 2014 would receive 49% of the benefits under Walker's proposal, even though they make up a little less than 20% of all tax filers. But they currently pay more in income taxes than other groups, which means they tend to get more of the benefits from cuts in income tax rates.

In the future, upper-income taxpayers would pay an even larger share of the income tax - a trend due to factors such as the fact that their incomes are growing at a faster rate than those of lower-income taxpayers. By 2014, taxpayers making more than $100,000 a year are projected to pay $4.68 billion, or 61.2%, of the total income tax.

Andrew Reschovsky, a University of Wisconsin-Madison economist, said the state has more than just income taxes to consider as part of its total cost to the public. Other taxes and fees such as the sales tax fall with more force on lower-income taxpayers, he said.

Within the income tax, there are ways to target tax cuts more toward lower- and middle-income families, he said. For instance, state officials could increase the standard income tax deduction.

That deduction is currently set at $17,880 a year for married couples, with a gradual phaseout that begins at annual household income of $20,090 and ends at income of $110,500. The phaseout of the standard deduction means that only families making less than the maximum income get any benefit from the deduction.

Another way to cut taxes would be to break up the state's unusually large middle-income tax bracket, which for married couples currently stretches from household income of $28,650 a year to $214,910 a year.

"There were many ways that they could have chosen to give a tax break," Reschovsky said.

That leaves plenty of room for politics and partisan sniping over the tax cut proposal.

Tuesday, Walker spokesman Cullen Werwie defended it with the administration's own set of figures.

"Governor Walker's income tax cuts target middle-class taxpayers. As you can see, the biggest percent tax change is for individuals making between $20,000 to $60,000 per year," Werwie said in an email.

Figures from the Fiscal Bureau back that up, showing taxpayers in the $25,000 to $30,000 income range would receive a tax cut of 3.3%, the largest tax cut in percentage terms.

Taxpayers making more than $300,000 a year would see a cut of 0.6%, the lowest of any income class. Taxpayers with less than $5,000 would see a tax cut of 1.5%, the next-lowest tax cut in percentage terms.

For Democrats, what matters is how much of the tax cut would go to the upper fifth of tax filers. In a statement, Rep. Sandy Pasch (D-Shorewood) said the tax cut for upper earners wasn't fair to all taxpayers or large enough to significantly boost the state's economy.

"Unfortunately, Walker's plan seems to amount to giving a minuscule handout to those already able to make ends meet, while shortchanging our citizens who are struggling to get by," Pasch said.

About Jason Stein

Jason Stein covers the state Capitol and is the author with his colleague Patrick Marley of "More than They Bargained For: Scott Walker, Unions and the Fight for Wisconsin." His work has been recognized by journalism groups such as the American Society of News Editors, the Society of American Business Editors and Writers, and the Association of Capitol Reporters and Editors.